Now that the goods and services tax (GST) is a reality, it is necessary to look at some key areas that the government should focus on to unleash the true potential of the indirect tax regime.
Fewer rates and classifications
The GST has four base rates (5 per cent, 12 per cent, 18 per cent and 28 per cent), two special rates (0.3 per cent and 3 per cent) and three rates of cess (1 per cent, 2 per cent and 15 per cent). While services were earlier taxed at a uniform 15 per cent, the four base rates are now applicable to services as well. The classification of goods and services across these rates is going to lead to disputes. The rates have also been changed a couple of times even before the launch, giving credence to the fact that the multi-tier rate structure and the rate equalisation exercise has created certain anomalies. Some of these issues have been addressed, while some would hopefully get resolved soon.
Hence, it is necessary that the government now focus on reducing the rate slabs to possibly two base rates of 18 per cent (standard rate) and either of 5 per cent or 12 per cent as the merit rate. This would reduce the potential for disputes.
Inclusion of petroleum products, realty and electricity
The GST leaves out three important sectors, making the coverage sub-optimal. Petroleum, real estate and electricity generation would continue to have the older indirect taxes. The problem is exacerbated by the fact that these sectors would pay input taxes in the form of GST, which cannot be offset against the existing taxes. It is essential that the government work on a time-bound plan to get these sectors into the GST framework. This will not only expand the GST basket but also make it a more comprehensive tax, besides ensuring that all suppliers to these sectors become part of the ecosystem.
The ability to handle the changes that GST entails would depend on the size and nature of a business. While large businesses have the resources and knowledge to prepare for a change of this magnitude, smaller businesses would find it difficult. Businesses used to filing monthly returns and dealing with state tax authorities will find it easier to deal with GST, compared with service providers accustomed to a centralised registration with two returns a year. There is also now a need to ensure invoice matching to get input tax credits and reduce tax payment liability.
It is, therefore, necessary that the government ensure a soft approach for the first year or so, instead of focusing on strict observance of provisions. Similarly, there should be some leniency in allowing input tax credits for the first year, and the implementation could become progressively stricter. This will make the GST more acceptable to all businesses. It is necessary to ensure that several penal provisions are kept in abeyance during the introduction period.
Existing tax issues and assessments
There is significant pendency of assessments in various states and a large amount of appeals pending at various levels of adjudication. Many of these relate to periods for which even records would be difficult to trace. GST signifies the commencement of a new journey. While embarking on this journey, it is essential to discard old baggage and start afresh.
The government should fix timelines for disposal of cases and assessments so that businesses can focus on GST compliance and not worry about older cases and other such matters.
Seamless GSTN portal
Key GST processes would be entirely dependent on an information technology (IT)-enabled platform. The government has taken considerable pains to ensure the country gets a world-class IT-enabled system.
But the government should ensure that the GST portal is appropriately tested, even if this means initial processes are put on an extended timeline. It is better to have a tested system with some small delays instead of launching an imperfect system on time. Any difficulty in accessing the database or in uploading transactions could lead to credibility issues.